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What does an Alternative Investment Fund Mean?

An Alternative Investment Fund is an asset, unlike the conventional investment categories like stocks, bonds, and cash. It is a strategic investment pool that provides a variety of tax and financial advantages for investment in venture capital, digital assets, commercial real estate single-assets and funds, hedge funds, and private equity. These investments may be crucial for diversifying your portfolio, reducing volatility, or accelerating growth under the correct conditions.

The process for alternative investment management is popularly growing to spread out the best opportunities for alternative investments over various markets, goods, services, and other ventures. Due to our strategic ties with top managers, we suggest alternative investments and complex solutions for various client demands based on your risk tolerance and liquidity needs.

What are the Types of Alternative Investment Funds?

The SEBI (Alternative Investment Funds) Regulations of 2012 categorizes alternative investment funds into the diverse types of investment realms available in the market. The diverse alternative investments fall under the following three categories:

1. Category I: Alternative Investment Funds

Funds classified as Category I primarily invest in infrastructure, startups and early-stage businesses, social initiatives, SMEs, and other industries deemed to be commercially or socially viable. Your business entity can opt for the following types of investments, which fall under Category-I:

1.1.   Venture Capital Fund (VCF)

Venture capital funds are categorized as alternative investment funds possessing high growth and risk potential. They mainly employ investment from startups and early-stage companies to overcome the financial crunch and enjoy the tax incentives offered by the Government.

Early-stage startups with innovative business ideas and little funds or experience are also free to invest in the VCF sub-category, Angel funds, which require a minimum investment value of Rs. 25 lakhs from every angel investor.

1.2.   SME Funds

SME funds, which stand for small and medium enterprise funds, require alternative fund investment in small and medium-scale business enterprises holding goodwill in profitability and growth prospects. The SME must be listed and traded under a separate segment of the Bombay Stock Exchange and the National Stock Exchange of India.

1.3.   Infrastructure Funds

Infrastructure funds ensure alternative investment in major infrastructure projects like airports, highways, bridges, ports, railways, and power plants. These funds were recently developed in India and include sovereign wealth, multilateral, and thematic alternative investment funds.  

1.4.   Social Venture Funds

Social venture funds, also termed social impact funds, are designed to ensure opportunities for alternative investment in enterprises or business ventures working for the social cause or positively impacting society or the environment.

The social venture or enterprise attracting social venture funds engaged in carrying out social welfare is registered as:

  • As a public charitable trust,
  • As a society registered for carrying out charitable activities,
  • As a company registered under section 8 of the Companies Act of 2013,
  • As micro-finance institutions.

1.5.   Special Security Funds

The special security funds allow investment in special situation assets like stressed loans for acquisition under clause 58 of the RBI's master directions, ensuring the transfer of loan exposure laid in 2021.

2. Category II: Alternative Investment Funds

Category II of the alternative investment funds is designed to attract the types of investment opportunities that allow investment in debt funds (of both public and unlisted firms), funds of funds, or private equity (PE) funds. Usually, the timespan for such types of investment is made with an investment horizon of four to seven years.

You can consider some of the category II alternative investment funds, as explained below:

2.1.   Private Equity Funds

Private or unlisted companies are free to invest in private equity funds registered as Category II AIFs. These equity funds last four to seven years and assist private companies in raising capital through debt or equity.

2.2.   Debt Funds

Debt funds are investments in the debt securities, instruments, or loans of unlisted companies. The main purpose of creating debt funds, which include bonds, debentures, and other fixed-income instruments, is to earn interest income and capital appreciation.

2.3.   Fund of Funds

A fund of funds is a type of investment that allows investment opportunities in other or the same categories of funds. Investors are offered a way to diversify their portfolios, ensuring hassle-free multiple investment options.

3. Category III: Alternative Investment Funds

This group includes funds with a short-term capital appreciation goal. Hedge funds and private investment in public equity funds (PIPE) are examples of types of investments. High-net-worth individuals choose hedge funds due to their aggressive management style, which generates large returns by investing in domestic and international markets.

3.1.   Private Investment in Public Equity Fund

Private investments in public equity funds are designed with a funding strategy to attract investments in public companies. These funds purchase the stocks of public companies at discounted rates.

3.2.   Hedge Funds

Hedge funds are an investment opportunity that uses techniques like derivatives, leverage, short-selling, and arbitrage to exploit market inefficiencies and generate high returns.

Hedge funds, private equity, real estate, and other tangible assets in your portfolio are some of the types of investments that can help you expand your approach to investing beyond just stocks and bonds.

Why Invest in AIFs?

Alternative investment assets are considered attractive options for specific investors intending to gain higher returns than traditional investment options. One of the main benefits of AIFs in India is their potential for high yields, with returns ranging from 12% to 18% annually.

This is why investors wishing to diversify their holdings and achieve above-average returns may find AIFs an appealing alternative. Consider the following reasons for putting money into alternative investment funds in India:

1. Diversification of Portfolios

It provides distinctive portfolio diversification and asset allocation. Compared to most other investment vehicles, a greater variety of asset classes is accessible for investment, and their performance is not influenced by stock market fluctuations. Consequently, fund managers have greater freedom when assembling a portfolio.

2. Volatility Awareness

The investments in an AIF have little to nothing to do with the stock market. As a result, their returns are not affected by the ups and downs in the overall market. Additionally, unitholders do not have to put up with volatility in share price because AIFs do not deploy funds to publicly traded investments. Thus, among the greatest investment options for portfolio stabilization are AIFs.

3. Fair Returns

AIFs can yield large returns since they can access a wider range of investments. These funds, unlike many traditional products like debentures or bonds, are a better source of passive income because of their investment philosophy. Moreover, because there is less reliance on the stock market, there is less likelihood of return volatility.

4. Allows Specialist Investment Opportunities

Alternative investment funds allow your business startup to invest in specialized investment opportunities unavailable to other investors.

5. Ensures Ease and Convenience

Alternative investment funds are easy and convenient to create as there is no need to open a Demat bank account, and NRI investors have no restriction on opening a portfolio investment scheme account. 

What does Alternative Investment Fund Management Includes?

Alternative investment funds are the best diversification options for high-net-worth individuals, institutions, and corporate clients. You can participate in this insightful exploration of alternative investment vehicles.

Those interested in building wealth for a lasting legacy are free to choose alternative investment management options that offer a wide range of products, including real estate, hedge, private equity, and residential and commercial real estate fund management services.

1. Compliance with AIF Regulations

Alternative investment management requires the investors to duly comply with the SEBI (alternative investment fund) regulations of 2012, which regulate the following:

  • Maintains compliance with the Alternate Investment Fund Registration requirements;
  • Must abide by the reporting requirements as specified by the SEBI;
  • Must routinely monitor for any update on AIF investment activities released by SEBI;
  • Must notify SEBI regarding any changes or updates;
  • Must abide by the investment restrictions, etc.

2. Eligibility for Making Alternative Investments

The alternative investment funds duly registered under the Securities and Exchange Board of India allow investment in different forms of companies and startups. The high-net-worth investors, qualified institutional buyers, family offices, registered investment advisor, and the fund sponsor (in unusual or non-traditional assets) must hold the following eligibility criteria for upholding alternative investment funds:

  • An Indian resident, NRI, or foreign national investor;
  • The investors that hold an adequate infrastructure and manpower for discharging their activities;
  • Investors holding a minimum investment limit of Rs. 1 crore;
  • Directors, employees, and fund managers holding a minimum investment limit of Rs. 25 lakhs;
  • Must not employ more than 1000 investors in one scheme, except angel funds (which allows only 49 investors).

3. Abide With AIF Taxation Rules

Investors must abide by the diverse taxation rules to attract categories of alternative investment funds in India. The investors eligible to invest in Category I and II of the AIF enjoy the status of pass-through taxation, which allows the payment of capital gain tax on the profit or loss accrued within a given time.

Meanwhile, investors eligible to invest in Category III of AIF are prohibited from enjoying the status of pass-through taxation. Category III of AIF must abide by the taxation rules authorizing the following types of income to be taxed:

  • For short-term capital gains,
  • For long-term capital gains,
  • For dividend income;
  • For business income.

4. Consider Factors for Making AIF Investment

Investors must consider certain factors before making an alternative investment fund for their enterprise. The following are the factors that must necessarily reviewed:

  • The investors must hold the attribute of tolerating the riskier funds;
  • The investors must secure to align with the AIF goals;
  • The investors must timely review the performance consistency of the AIF;
  • The investors must evaluate the alternative investment fund management fees;
  • The investors must evaluate the risk profile of the AIFs;
  • The investors must be aware of the available exit options.

5. Manage Challenges while AIF Investment

Investors usually face diverse challenges while investing in alternative investment funds. We cater services to understand and tackle these challenges that ensure the management of alternative investment funds in India:

  • Liquidity challenges for many long-duration AIFs;
  • Staying updated with the regulatory changes is a mere challenge that affects the management of alternative investment funds in India;
  • Investment in high minimum AIFs limits access for smaller investors;
  • Volatility risks for investing in non-traditional asset classes like private equity, venture capital, etc.

6. Draft Alternative Investment Management Strategies for Higher Returns

An investor can target specific risk-return characteristics using alternative investment fund strategies and potent financial instruments. The intention is to provide an alternative risk-return pattern to traditional investing, possibly even turning a profit while traditional markets or assets are losing value.

Investors must consider fresh, dynamic opportunities in the current market climate to achieve their return goals. Selecting an alternative investment fund manager who possesses the committed investment skills necessary to produce returns in this complex and varied asset class is essential. The reasons how the strategies help are discussed below:

  • Expertise - Our independent alternative investments teams' specialized experience and global access may be of service to our clients;
  • Procedure - Strategies are founded on a thorough grasp of international markets as well as validated basic and quantitative research;
  • Outcomes - Biggest alternative asset managers offer years of expertise in implementing cutting-edge strategies throughout market cycles.

7. How to Invest in an Alternative Investment Fund?

Investors can use the following methods to invest in pooled funds, which attract various alternative assets like hedge funds, private equity, and real estate. The generalized procedure to start investing in alternative investment funds attracts an alternative investment strategy, securing the capital requirements and extensive market research that best matches the investment objectives of the Reserve Bank of India. The broad overview of investment management services secures the procedure for starting an alternative investment fund in India.

  • Investigate and ascertain the investor's suitability for the AIF investment available;
  • Hold in-depth knowledge regarding the various types of investment options like exploring private equity funds, real estate funds, hedge funds, etc.;
  • Recognize the charges required for investment;
  • Complete filing the paperwork to invest in an alternative investment fund;
  • Track record your AIF duly entered.

8. Ensure Attainment of Alternative Investment Fund Growth

Retail investors now have easier access to AIFs because the SEBI introduced a framework for "small" AIFs in 2019, which require a minimum investment of INR 1 crores. AIFs have proven a desirable choice for overseas investors wishing to participate in the Indian market, with almost 60% of AUM in AIFs managed by foreign investment managers.

Furthermore, this pattern is anticipated to hold, with the Indian AIFs market expanding at a compound annual growth rate of 18.5% between 2020 and 2025. This growth is attributed to the advantages of AIFs, which include the following:

  • The advantages of AIFs, which include their capacity to invest in various assets, from infrastructure and real estate to private equity and distressed assets, are responsible for this expansion. Investors who diversify their holdings may be able to reduce risk and increase returns;
  • Alternative investment funds can also present unique investment opportunities, such as startup businesses and alternative energy projects that are not accessible in typical markets;
  • The transferability of alternative investment funds is another important benefit, offering investors more liquidity than traditional investments because they can be transferred from one investor to another. This can be especially helpful for investors who wish to sell their holdings before the fund's term expires;
  • Alternative investment fund regulations were enacted in 2012 by the Securities and Exchange Board of India (SEBI), which contributed to the development of a more accountable and transparent sector. Furthermore, the Alternative Investment Fund Managers Regulations, which were introduced in 2012, have given alternative investment funds in India more transparency and responsibility;
  • Alternative investment funds provide great flexibility in their structure and investment approaches. In contrast to traditional investment vehicles, alternative investment funds can adopt a variety of investment strategies, including long-only, long-short, event-driven, and more. They can also be formed as trusts, limited liability partnerships, or companies. This flexibility makes alternative investment funds extremely customizable investment choices, enabling them to meet investors' unique requirements and risk tolerance.

Importance of Alternative Investment Fund Management

Alternative investment fund management is essential for supervising and carrying out the regulatory obligations placed on the investment manager by the regulator, parallel to keeping an eye on investment limitations and risk tolerances that may be customized especially for the fund. Consider the reasons why you must opt for services for the management of an alternative investment fund:

  • On behalf of the investment manager, the company managing the alternative investment funds is authorized to handle the enormous volume of regulatory filings and quarterly reports required by the regulator. This can be quite time-consuming and resource-intensive for a company, but it also lessens the investment manager's total workload by eliminating some of the more labour-intensive administrative tasks;
  • Using alternative investment fund management services strategizes the liquidity requirements and exit provisions when the investors are unable to redeem their investments during the lock-in period;
  • Choosing alternative investment management services protects the interests of the investors through proper background verification (based on reputation, financial stability, regulatory norms, etc.) of the alternative investment fund in which the investor is willing to invest.

What are the other investment options available to investors?

Investors urging higher returns are offered multiple investment options, such as portfolio management services and mutual funds, where equity or debt investments are managed by professional fund managers. The following are suitable investment vehicles that can fulfil your unique investment requirements.

1. Portfolio Management Services in India

A portfolio management service, also known as a non-discretionary or discretionary PMS, is a professionally managed service in which qualified and experienced portfolio managers manage the investor's investment portfolio.

Portfolio Management Services are specialized investing services that cater to investors' time commitments, expectations for returns, and risk tolerance. The investors receive a new bank account and a Demat account to house the shares, and they are quite customized.

Comparative Analysis between PMS and AIF

Consider the following points for securing the comparison between portfolio management services and alternative investment fund services:

  • PMS offers a little bit more liquidity, while alternative investment funds have significant capital requirements and lock-in durations;
  • PMS provides real-time tracking and optimization of your assets, while alternative investment fund provides superior flexibility and diversification in non-conventional securities. Given their high-risk reward ratios, investors can choose based on several factors: tenure, liquidity, preferred securities, and investing goals.;

Now that you understand AIF investments, you can select a fund scheme that complements your investing objectives. Before investing, research the fund's historical performance to make an informed choice.

2. Mutual Funds in India

Mutual funds are investment vehicles mostly managed by professional fund managers. The options for investment specified under mutual funds are equities, debt, money market instruments, and other securities. The Securities and Exchange Board of India is the regulatory body that predetermines the investment options suitable for investors' profiles.

Comparative Analysis between Mutual Funds and AIF

Consider the following points for securing the comparison between mutual funds and alternative investment funds:

  • Access: The mutual funds are available to all types of investors, whereas the alternative investment funds are only available to a limited number of investors;
  • Regulation: The mutual funds are governed under the SEBI (Mutual Funds) Regulations of 1996, whereas the AIFs are regulated under the provisions of the SEBI (Alternative Investment Funds) Regulations of 2012;
  • Minimum Investment: The minimum investment value for mutual funds ranges between Rs. 100 (through SIP) to Rs. 5000, whereas the minimum investment value for AIFs requires Rs. 1 crore;
  • Investment Objective: the prime object of mutual funds is dedicated to long-term growth and income generation, whereas the AIFs are devoted to higher returns, capital preservation, or diversification;
  • Types of Investment Options: Mutual funds are categorized into Equity, Debt, Hybrid, Solution-Oriented, and other schemes, whereas AIFs are categorized into Category I, II, and III investments.

Enterslice Services for Alternative Investment Fund Management

Enterslice has a wealth of experience managing alternative investments and funds for infrastructure, real estate, private debt, and private equity and hence provides eligible participants with a comprehensive range of alternative investing options spanning alternative investment management.

Consult our private wealth or financial advisors to secure an alternative investment fund strategy that might bolster your portfolio. Our industry experts guarantee seamless fund management strategy and investing process alignment to provide knowledge on intricate risk and compliance issues, assist fund managers in realizing their investment goals, and provide value to their clients; we may offer a smooth one-stop-shop solution.

We manage and supervise alternative investment funds, such as hedge funds and private equity funds, as part of our alternative investment fund management services. The following are the crucial services offered by us:

1. Compliance Service

By offering assistance with alternative investment funds' adherence to legal standards, we support investor protection and openness under the regulatory and statutory framework designed by the Government.

2. Risk management Service

Enterslice helps to ensure optimum return assurance and overall fund stability by minimizing and controlling the risks associated with the investments.

3. Enhanced Performance

Through effective strategic planning and investment execution, our alternative investment fund management service enhances the investment's overall performance, benefiting you in the greatest way possible.

4. Ensures Operational Support

We are dedicated to offering secured comprehensive services for capturing data, drafting daily business reports, and ensuring transaction settlements.

5. Portfolio Management Service (PMS)

The management services' in-house research team assists in selecting investments by conducting comprehensive research on every industry, sector, and company. The team also keeps a close eye on global events, macro and microeconomic outlooks, and investment selections. They strive to attain exceptional returns on their clients' investments while skillfully controlling risk, and they give their clients regular updates and performance reports.

6. Other Services

Portfolio management, investment oversight, customized risk management, and delegate oversight are just a few of the many services offered under our alternative investment fund management services.

Frequently Asked Questions

Alternative investment funds are privately pooled investment vehicles that allow investment in alternative assets including hedge funds, private equity, venture capital, real estate, commodities, and derivatives.

The AIF in India is regulated by the SEBI (Alternative Investment Funds) Regulations of 2012.

AIF ensures better return rates than Mutual Funds by providing investors with a way to pool their money and the freedom to participate in various assets.

Indian residents, non-residents (NRIs), and foreign national investors can invest in Alternative Investment Funds.

The alternative investment fund management system is a supplemental strategy that provides for leverage, investment concentration, and portfolio hedging, which are not typically included in conventional investment plans.

The minimum investment amount for directors, staff, and fund managers is Rs. 25 lakh, while the minimum investment limit for investors is Rs. 1 crore. .

The AIFs are categorized under three major heads for categories I, II, and III.

Alternative investment funds include infrastructure funds, venture capital funds, debt funds, hedge funds, private equity funds, etc.

Yes, categories I and II of AIFs are exempt from all types of tax obligations on their investment income, whereas, the pass-through taxation regime does not extend to Category III of AIF.

Category III of AIF are one and close-ended funds that allow investment in the securities of listed and unlisted investee companies or other AIF units.

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